“It all depends on which Trump shows up,” says Piyush Gupta when asked to predict the impact of Donald Trump’s election on Asian banks and companies. “Will it be Trump the businessman or Trump the demagogue?”
That question has dominated discussion among economists, politicians, and journalists since the US election on November 8. Nomura analysts told their clients in a note on Monday the outlook for Asian equities was dependent on changing expectations about Trump.
But the silver lining the DBS chief executive and other bank executives are focusing on is the impact of Trump on US interest rates.
The fiscal stimulus programme Trump suggested looks likely to drag prices higher, leading to a quicker round of interest rate rises from the Federal Reserve. That will raise borrowing costs, but it will also push up a key source of revenue for banks — net interest margins (NIMs), the difference between interest paid and interest earned.
“Banks are just bleeding because of low NIMs, so anything that will push interest rates up is going to have a major impact on our bottom line,” Gupta said.
In the first quarter of 2007, before the global financial crisis ravaged bank earnings, DBS had a NIM of 2.21%. In the third quarter of this year, the bank’s NIM was 1.77%.
Trade off
Gupta, like other bank executives, is trying to figure out how the election of the unpredictable Trump will affect his bank’s performance. The broad rally in US stocks since the election shows the potential benefits a Trump presidency will likely bring — but there are obvious risk factors.
“The market reaction so far has focused on Trump the businessman,” said Gupta. “There is a view that he will be very business-friendly. But the opposite view is that he will almost certainly create trade barriers.”
That may have a long-term negative impact on the United States itself. But Asian economies will be damaged even in the short run.
Asian countries are running a $401 billion goods trade surplus with the United States this year, according to data from the US Census Bureau. Trump’s anti-trade rhetoric — including condemning the Trans-Pacific Partnership — raises questions about how long that can last.
“If he winds up promoting tariffs on trade for Asia, that’s going to negatively impact Asia, without a doubt,” said Gupta. “We need to watch the next 60 days to see which Trump comes to the party.”
Gassed out
This is one concern among many for a CEO who is positioning his bank to be resilient in an increasingly unpredictable world. DBS garnered headlines in July, when problems in Singapore’s oil and gas sector threatened bank lenders’ stocks.
But on that score, at least, Gupta said DBS has moved past the worst of it. He told FinanceAsia that the bulk of DBS’s lending portfolio in the sector was “extremely well-secured”. He rings a defiant note when asked about lending to the sector, pointing out quite how different the world looks when Brent crude is trading at less than $50 a barrel.
“Most of the exposures that we put on in the sector were before the summer of 2014, when oil prices were at $130 and houses everywhere were calling for oil to hit $150 or $200,” he said.
“It’s easy to do Monday morning quarterbacking, and if we had known then what we know now we would have done things differently, but given the information in the market at the time it made sense to increase exposure to the sector.”
DBS’s stock has certainly recovered dramatically since late July, when concerns about oil services company Swiber pushed some investors to sell. But helped by the wider post-election rally, DBS is up 3.83% for the year, and has risen more than 13% since the US election.
Gupta says DBS is a “Goldilocks size” — not too big and not too small. That allows the bank to take a nimble approach to lending and sector exposure, and appears useful at a time when some of DBS’s bigger rivals are cutting their client bases.
Selective expansion
“Our strategy is quite different from a lot of the big global banks,” Gupta said. “The strategy of shrinking the customer base is not the way to get to a thriving franchise. But it is still possible to grow your footprint while being somewhat more selective when it comes to new clients.”
The same applies to expansion. Gupta describes his acquisition strategy simply. Potential targets need to be more than just good strategic fits or cheaply priced, they also need to be manageable enough that the sheer size of a takeover does not become overwhelming.
The recent acquisition of ANZ’s Asian retail and wealth management assets fits the bill, he said. While he refused to be drawn on the point, some sources have said that the acquisition means another potential deal — the purchase of ABN Amro’s Asian private bank — is probably off the table for now.
That would make sense for a bank that has kept most of its acquisitions small. DBS has long focused its efforts on growing organically across Asia. That has served the bank well. But amid a rapidly changing banking landscape DBS is now positioning itself to win more of the pie.
